Key views Global Monthly February 2024
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The global economy is likely to grow at a subdued pace in the near term, as high rates continue to bear down on demand in advanced economies, while China continues to face both cyclical and structural headwinds. Global trade and industry looks to be bottoming out, but a sharp rebound is unlikely while rates remain restrictive. On the positive side, inflation has fallen significantly and is now within touching distance of central bank targets. The Red Sea disturbances are unlikely to meaningfully impact inflation, but a major escalation in the Middle East could change matters. Further falls in inflation will enable central banks to pivot to rate cuts by mid-2024, and financial conditions are already easing in anticipation of this. Still, monetary policy will remain relatively tight for some time yet, and this will keep a lid on the recovery.
Macro
Eurozone – GDP stagnated in 23Q4. Growth has been close to zero now during five consecutive quarters, and the expectation is for another stagnation in 24Q1. GDP should expand moderately during the rest of the year, among other things because fiscal policy will be tightened. Labour market conditions have deteriorated, which will limit wage growth going forward and reduce underlying inflationary pressures. Headline and core inflation have remained on a downward trajectory moving into 2024. We expect headline and core inflation to be close to the ECB's 2% target around the middle of this year.
The Netherlands – The Dutch economy expanded by 0.3% qoq in Q4, bringing an end to three consecutive quarters of contractions. We raised our GDP forecasts to 0.7% in 2024 (was 0.5%) and 1.2% in 2025 (was 1.1%). Labour market tightness remains, but the unemployment rate will marginally rise to 4.0% in 2024. Inflation (HICP) continues trending downward to average 2.8% this year, down from 4.1% in 2023. Formation talks recently stalling, which delays the forming of a new government and adds to policy uncertainty.
UK – Disinflation has continued, providing some relief to the Bank of England, but upside inflation risks remain significant given that wage growth is still elevated and well above levels consistent with the 2% target. At the same time, unemployment has started rising, and we expect a softening in demand to dampen wage growth over time. The economy is expected to broadly stagnate over the coming year or so, weighed by tight monetary policy.
US – Growth slowed in Q4 following an exceptionally strong Q3, but remained well above trend. The recent strength in inventory build makes the economy vulnerable to a sharp slowdown in coming quarters. We also expect a slowdown in consumption given the cooling labour market and a reduced tailwind from excess savings. We expect weak growth in the next few quarters, before easing financial conditions set the stage for a recovery later in 2024. Wage growth has peaked, and inflation is moving in line with expectations back to the 2% target. A recovery next year hinges on a timely pivot to rate cuts by the Fed in response to falling inflation.
China – Recent data still paint the picture of an uneven recovery – with ongoing headwinds from property, and with the supply side still stronger than the demand side. CPI inflation turned deeper into the red in January, but LNY holiday data showed some green shoots. In line with our expectations, Beijing continues with piecemeal easing and targeted support. The PBoC cut banks’ RRR and the 5-yr LPR this month; we expect more mini rate cuts to follow. Meanwhile, the expansion of the PBoC’s balance sheet is partly a result of the use of a targeted lending facility.